Adithya Sanjay: Did the government shutdown actually do anything to slow down the economy?

Sunday, February 3, 2019 - 5:16pm

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The Michigan Daily

For 35 days, the U.S. government remained shut down, marking the longest government shutdown in U.S. history. The world was seemingly reduced to a gridlock between President Trump and Speaker Nancy Pelosi, D. Calif., as both parties struggled to come to an agreement over how much money should be allotted towards border security in the federal budget. The event dominated the news — headlining broadcasts almost daily. And just when it seemed that the U.S. political system had reached its untimely demise, the president surprised the world by signing a continuing resolution that reopened the government temporarily. But while news reports were quick to report the “devastating effects of the government shutdown,” how much of an impact did it really have on the U.S. economy?

The Dow Jones Industrial Average has been on somewhat of a tear so far this year, reporting gains of nearly 2,000 points so far in the month of January. As many big-name corporations have released positive results from the past quarter, many investors are optimistic about the market. More than that, the Federal Reserve's recent decision to go easy on interest rates resulted in a huge upside in the market, with the Dow jumping over 300 points in response to the news.       

This seems very contradictory, however, with many reports showing a massive reduction of consumer confidence as a result of the shutdown, with the said metric at its lowest level since July 2017. Not to mention, shouldn’t the 800,000 workers that were furloughed as a result of the shutdown have some impact on the economy? Or what about the $3 billion of deadweight loss that will never be recovered?     

For starters, we must understand what causes a stock – or the market as a whole – to go up or down. Things like better or lower-than-expected earnings can cause a stock price to fluctuate, as can (as previously mentioned) a change in interest rates. But stocks also respond to political and social factors that have the potential to affect the market in the long run.      

It is worth mentioning that the stock market isn’t the same thing as the economy. In many cases, it is a very good measure of how the economy is doing, but its short-run fluctuations don’t really tell us as much as its trends in the long run do. Nevertheless, the market often does act as a delayed reaction to different economic trends. For example, only when a company reports its earnings for the past quarter (or forecasts their earnings close to the end of the quarter) will the price of the stock react to the information. It's almost never an instant response.      

When the government finally reopened last weekend, a lot of people expected some sort of an increase in stock prices, as the economy was seen to have a more certain future. Instead, “the markets couldn’t care less” with the S&P 500 climbing 0.8 percent and the Dow up 1 percent the afternoon Trump made the announcement, due more so to the Fed’s decisions on interest rates than due to the shutdown. The recent activity in the U.S.’s trade talks with China and the aforementioned decisions made by the Fed seemed to be viewed as far more important than the shutdown. And this has been true in the past, with the stock markets historically not really reacting to shutdowns.

Part of this has to due with how commonplace a shutdown is. In fact, since 1976 there have been 18 shutdowns. The other part is that it really doesn’t have an impact on the economy — at least for now. While there may have been a lot of government workers without jobs, traders were more concerned about earnings season, and how each company fared in the last quarter. This is not to say that there were not personal economic losses to these furloughed workers, with many unable to make due diligence on rent and loan payments. That said, while 800,000 individual workers do seem like quite a lot, their welfare does little to impact the economy as a whole — at least for the length of time the shutdown occurred. Perhaps the inefficiencies would have piled up had the shutdown persisted for longer.

Nevertheless, when the U.S. is operating on a $20 trillion economy, a $3 billion loss is very trivial. We’ll have to wait and see to what extent this is true until the end of the current quarter, when companies report whether they matched up to expectations. But for now, it seems that the economy is going to keep chugging along, with little care that the government was shutdown for more than a month.

Adithya Sanjay can be reached at asanjay@umich.edu